Magyar Telekom Tavkozlesi Nyrt

OTC:MYTAY

[Call Starts Abruptly]

customer satisfaction. It is in this context that we strive to provide seamless connectivity and outstanding service.

To this end, we remained committed to network developments. We progressed our multi-year mobile network modernization program, aimed at upgrading and improving service quality while increasing capacity to meet escalating data demands, which are growing at a rate of 26% per annum. Furthermore, as the next phase in this program, from June 1, 2023, we expanded population-based outdoor 5G coverage to 60%, bringing the latest generation of mobile technology available to a broader customer base.

We also decided to make 5G access automatically available to our customers as part of a summer promotion, enabling almost 1 million customers with 5G capable devices to experience the benefits of 5G.

At the same time, demand for gigabit access remained strong, with over 1.3 million customers now connected to our gigabit network, an increase of 18% year-on-year. It is clear that networks enabling high-quality and high-capacity data are the most in demand and, as such, these investments are essential to future success.

To position ourselves as a truly future-proof, digital telecommunications company, it is essential not only to establish advanced networks but also to transform our internal and external operations, transitioning them into efficient, digitized and automated processes. Our efforts in this regard have already realized several tangible results.

For instance, our call center Artificial Intelligence, ‘Vanda’ by now handles over 20% of customer calls and chat messages. During the past quarter, we have also completed the review of our sales processes and implemented changes to improve and simplify our digital servicing solutions and shorten transaction times.

Furthermore, we have progressed the digitalization of our internal operations, automating several internal processes through the integration of AI-supported solutions in areas such as data management and analysis.

Finally, we have further enhanced our financial strength which in the current macroeconomic environment, is especially important. As previously reported, from March we implemented an inflation-based fee adjustment across the Hungarian subscription fees, helping us to mitigate cost pressure stemming from the sharp rise in input prices.

We also undertook a thorough analysis of the businesses cost structure and cost transformation by rationalizing processes and using new, alternative solutions. Recent achievements in this respect include the further rationalization of our real estate portfolio, including the utilization of our headquarters, automating several internal processes via AI solutions, and capitalizing on positive developments in global energy prices by around 40% of next year’s electricity needs.

Now, turning to the developments in our operational performance on Slide 4. In the Hungarian mobile market, customer base expansion continued, with growth stemming primarily from postpaid customer additions and a sharp rise in demand for M2M SIM cards. In parallel, the number of customers opting for our mobile data services continued to grow, along with average data usage. This underscores the importance of the ongoing mobile network modernization process and the 5G developments that enable increased capacities and enhanced user experience.

As illustrated by the bottom right chart, voice usage continued to decline. This was particularly noticeable among business and prepaid customers, where optimization efforts are starting to take effect. These developments combined, led to year-on-year ARPU increases, with particularly notable growth in the postpaid category. ARPU levels in this segment have also been supported by the impact of the 14.5% inflation-based fee adjustment applied to subscription fees.

In the Hungarian fixed service market, presented on Slide 5, we continued to witness strong demand for our services delivered through our gigabit network, particularly in the high bandwidth broadband and IPTV products. Consequently, the number and ratio of double-play customers among our residential user base continued to increase, driving the overall household base up by 3.6% year-on-year, despite the continued decline in the voice-only subscribers. The increase in the ratio of customers on the gigabit network with higher value subscriptions, coupled with the implementation of inflation-based fee adjustments contributing to underlying results and trends, resulted in year-on-year improvements in all ARPU categories.

Turning to the financials, I will begin with our revenue performance, as shown on Slide 6. As mentioned earlier, strong commercial momentum, increased demand for mobile data and further expansion of the fixed broadband and TV customer base continued through the second quarter. This resulted in a HUF 47.4 billion increase in revenues for the first half of the year, in comparison to the base period. In addition to the increased service revenues, our system integration and IT revenue grew by HUF 5.8 billion, reflecting more favorable within year project distribution and revenues from high value projects. The HUF 4.7 billion increase in the other revenue category was driven by both higher visitor revenue and higher interest revenue in relation to the equipment installment sales related present value discount.

Turning to Slide 7 and our profitability. I am pleased to report 11.4% year-on-year growth in EBITDA AL for the first half of 2023. This achievement is primarily due to the sustained gross profit increase in the second quarter, resulting in a 16% increase in the first half of 2023 compared to the base period. This growth has been largely driven by positive developments in our underlying telecommunication services, including the impact of inflation-based fee adjustments.

However, we continued to navigate in a challenging macroeconomic environment throughout the quarter which put pressure on other indirect costs. We experienced substantial increases in electricity costs and pressure from other inflation-driven costs, while employee-related expenses grew due to wage increases implemented on 1 January in the Hungarian operation.

During the first half, we recorded year-on-year HUF 2.3 billion higher supplementary telecommunication tax charges, in line with the higher Hungarian revenue generation, whilst the HUF 3.3 billion subsidiary sale gain booked in the base period also had a negative effect on the year-on-year comparison.

Slide 8 shows the trend in our net income and adjusted net income. In the first half of the year, reported net income grew by 13%, primarily thanks to EBITDA growth of HUF 13.9 billion coupled with slightly lower depreciation and amortization expenses. The latter is a combined result of our efforts to optimize IT infrastructure which led to lower software-related depreciation expenses in Hungary, as well as the absence of one-off increases related to the shortened useful life of equipment and accelerated depreciation in relation to the RAN modernization program in North-Macedonia.

The positive year-on-year EBITDA and D&A impacts were partially offset by higher net financial expenses. The latter is driven by higher interest expenses related to lease liabilities, installment sales and higher average interest costs.

In addition, unfavorable changes in the other financial expense due to different shifts in relevant yield curves and different euro-forint currency movements together resulted in a year-on-year deterioration in the fair value of derivatives.

Adjusted net income amounted to HUF 37.8 billion in the first half, an increase of HUF 12.1 billion compared to the base period, owing to the improvement in profitability. Adjustments totaling HUF 5 billion were mostly related to non-realized losses associated with measuring derivatives at fair value and exchange-related changes.

Slide 9 presents the Group’s free cash flow generation and capital expenditure developments in the first half of 2023 compared to the corresponding period in 2022.

Free cash flow generation without spectrum-related payments was lower by HUF 25.1 billion, due to the deterioration in working capital. The decline in working capital was due to supplementary tax payments of HUF 26.4 billion, which comprised a 2022 tax settlement and a 2023 advance payment which were both missing from the base period.

Meanwhile, strong operational performance was offset by higher lease liability outpayments and higher interest on loans and lease components. Regarding our investments during the first half of this year, CapEx after leases excluding spectrum licenses was down 6.8% year-on-year, amounting to HUF 49.0 billion in 2023.

As the chart on the right-hand side illustrates, the make-up of our investments was a bit different compared to last year. Due to the continuous uptake of the gigabit service in Hungary, we invested almost one-third more CapEx to fiber provisioning and CPEs, while our network investments were lower in both countries as in Hungary almost 80% of our fixed network is already gigabit capable and the mobile network modernization in North Macedonia was already completed last year.

Finally, turning to Slide 10 and our progress against our 2023 guidance. Revenues recorded a 13.3% year-on-year increase in the first half of 2023, thanks to the combined effects of strong underlying telecommunication performance, the impact of inflation-based fee adjustments, and higher SI/IT revenues.

Looking to the second half of the year, we expect revenues to continue to benefit from customer base expansion and the inflation-based fee adjustment, however, we also expect the economic environment to exert pressure on both household and business spending.

The development of EBITDA after leases will reflect positive gross profit trends partly offset by increases in indirect costs due to the prevailing inflationary environment, which is expected to persist throughout the year and the further increases in employee-related expense with the additional salary increase effective from July 1.

Furthermore, given Hungarian interest rates have started to decline, adjusted net income is predicted to perform better than previously forecasted. We expect adjusted net income to grow by a double-digit rate year-on-year.

Finally, with regards to free cashflow, seasonal differences are expected to be eliminated by the year-end, with EBITDA development also driving annual improvement in cashflow performance.

That concludes our presentation, I will now hand back to Dia.

Thank you very much Darja. We are now happy to take any questions you may have. [Operator Instructions]. Good afternoon, Nora. You can unmute yourself and ask your question.

Hi. Thank you. Good afternoon, and thanks for the presentation and congratulations on the results. I've two questions, please. Firstly, do you have some estimate when the growth of planned mobile ARPU reached the level of inflation in Hungary? As we've seen that fixed broadband ARPU is already there. And secondly, if you share with us, what's your expectation regarding the cost development in second half? We heard about personal expenses but if you could also explain a bit, what's your expectation for energy and other inflated cost items? Thank you.

Good afternoon. Nora. This is Darja speaking. So first of all going to your second question, and I will come back to your first one about the indirect cost development in the second part of the year. So, we highlighted that there were practically three elements of the course increase in the first half of the year, year-over-year energy expenses. It was in the magnitude of 4 billion year-over-year, our additional vendor course in the magnitude of 1.5 plus employee expenses, we expect in this view, that similar trends both for energy and vendor costs will be visible in the second half of the year.

When it comes to the app you growth in line with inflation, maybe just to highlight and once again, emphasize inflation based fee adjustment awards are done for the subscription fees. So we are not adjusting all the tariffs, it's only adjustment, inflation base fee adjustment, the subscription fees, for example, the usage related tariffs, they are not subject of that adjustment. Therefore, it would be fair to conclude that only the part although substantial part is impacted by this inflation base adjustment and another part of the subject of the business as usual commercial development.

Good afternoon [indiscernible], you can unmute yourself and ask your question.

First of all, I would like to ask about inflation adjustment of fees. I know that in Poland, this has been a rather sensitive topic as the competition or consumer protection agency has been not looking well at it. Do you have any cases of any arguments on this topic in Hungary or this is kind of widely accepted that this inflation adjustment can be effected? And there are no significant risks of further penalties coming from this? And secondly, maybe you can remind me about the current regulatory fees that you are obliged to pay and then how long they plan to be in effect and whether you see that any changes are planned in this regard. Thank you.

Peter, to your first question, the cases are not familiar for us in Hungary when it comes to the inflation-based fee adjustments. To the second question, I'm not 100% sure if when you say regulatory fees, what you exactly mean I can only assume that you're referring to the special tax environment in Hungary.

Correct.

Okay. So if this is the case, we have three special taxes are in our case, the first is talking to the recently introduced supplementary telecommunication tax introduced last year in 2022. The original time framework was still '23, so for the year '22 and '23. Recently the duration of the supplementary to telco tax was prolonged and includes now the year 2024. The second casual tax which we have in our P&L, this is so called utility tax impacting investments into the infrastructure in particular fiber infrastructure. And the third tax, the way how we call it is a telecom tax subject of the tax is the SMS and the voice minutes. It's roughly 12 years with us for this tax.

Okay. And this -- there are no, no changes in the utility tax, I understand.

In regards to the utility tax.

If you have any further questions, we are happy to take any questions you may have. [Operator Instructions]. And [indiscernible], you can unmute yourself and raise your hand and ask your question.

Congratulations for the very strong results in the second quarter. Last couple of questions are performance in terms of KPIs. First is, I wanted to ask about –

Sorry for interrupting you. But we hardly hear you so can you be closer to the microphone because it's not fully understandable. Sorry for the interruption. But can you repeat your question?

Okay. Yes. So I wanted to ask, what's your view on the customer-based evolution because you're reporting quite solid net ads in Hungary. Are you winning market share [indiscernible] this week from competitor or is it just drove off the whole market? And also wanted to ask about this hike in number and [indiscernible] one off or is it a new trend visible in the market like an accelerated digitization?

Daria speaking. So on the MTM dynamic, we don't see any particular special or triggers for this developments, rather more natural development and trend on the telco markets and in Hungary as well somehow underlying the digitization needs. When it comes to the customer base development and evolution of the market itself, actually, we don't have the full statistics of how the competition in particular in the second quarter was developing. However, we have a strong belief that our strategy which we were using in the past and continuing to use in monetizing our investments into the mobile network and fixed network is paying off through the increase in customer numbers and ARPU as well.

Okay. Thank you. And just wanted to ask about your expectations regarding the IT revenues going forward. The second quarter was especially inspiring. What about the first quarter and outlook for the second half of the year? Is there already some improvement in terms of the demand, especially from the public customers or not yet?

Relating to their forecasts and estimations for the IT&SI, you might notice that in my presentation, I highlighted that very favorable development in the first half of the year was very much linked to the time dynamic. So practically, the results of the first half of the year cannot be taken as fully representative for the assumptions of the second half because we still believe that recession impacts will impact in particular public segment which could have a certain implication on the SIIT development in the second half of the year.

Thank you. So last question from my side, you're expecting as always free cash flow year dynamic growth in 2024, what level of dividends or in general investor remuneration can we expect next year? Can you provide us with any rough guidance on this model?

The only guidance, I can provide you on that one that we are committed to follow the existing shareholder remuneration policy. Just to remind ourselves it's linked to adjusted net income and the shareholder remuneration can reach the magnitude of 60% to 80% of the adjusted net income of their respective year of earnings.

And also we continue to believe that shareholder remuneration has two important components, the cash dividend and the share buyback. And the final decision of the composition of the level of this cash dividend and share buyback in the framework of this shareholder remuneration is always subject to the approval of the board of directors.

[Operator Instructions]

I will have a follow up. In this earning season, we heard from telecoms that AI is not only about digitization and automation for them, but also they see higher demand for IT projects, is this the case also on your end?

Yes. Sorry for the delay because was not quite sure if your question relates to the market dynamic or to us Magyar Telekom. But when it comes to the market dynamics, yes, we do see that there are some sub-segments in the market or actually interested and developing different solutions in AI. But please also if the question was related to us specify this because I'm not 100% sure it was market.

Yes, sorry, it was for Magyar Telekom.

In general, I think it's not a secret that we have our special tool based on AI, which was developed actually already a couple of years ago and I mentioned this in presentation which is Vanda. This is tool helping in particular colleagues in the back office to handle the requests of our customers. Now, and this is of course, one of the business opportunities which we see for us as well not only for the internal usage, but for the external market. And we are assessing other opportunities in that regard as well.

Thank you again for joining us today. Please note that a transcript of this conference call will shortly be available on our website. If you have any follow up questions, please don’t hesitate to contact us.